Auditor Road Show: “What Are You Thinking?”

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Established one year ago, the Center for Audit Quality has become the official spokesperson and image booster for accounting firms. During its short life, the Washington, D.C.-based trade group has opined on regulatory proposals, conducted webcasts on issues facing the industry, and grabbed two spots on the Treasury Department’s Advisory Committee on the Auditing Profession.

To keep tabs on an industry that’s constantly adjusting to new rules amid constant scrutiny, Center officials have been traveling around the country collecting good and bad comments about public-company audits from corporations, investors, and others with vested interests in the audit industry. In the middle of those discussions sits Cynthia Fornelli, the Center’s executive director, who has become the spokeswoman for the 800 accounting firms that make up the CAQ’s members. Her mission: to foster confidence in the audit profession.

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A former Bank of America executive and deputy director in the Securities and Exchange Commission’s investment management division, Fornelli recently discussed with CFO.com the CAQ’s plans for 2008. At the top of its agenda is a report with recommendations for improving the profession, which Fornelli expects will be completed sometime this year.

Why was the CAQ formed?

We help the public-company auditing profession by speaking with one voice to the issues that face public companies in our marketplace. Our key stakeholders are issuers, investors, regulators, and academics. We always make sure we have the perspectives of those key stakeholders top of mind.

“I think that everybody agrees that convergence to a single set of high quality standards is important and that the easiest way to do that would be the adoption of IFRS.”- Cynthia Fornelli, the Center for Audit Quality

What progress have you made in the past year? We’re on our eighth city of 10 cities in our year-long … public dialogue tours, where we bring together our four key stakeholder groups to talk about how to modernize business and financial reporting. After we’ve gone through the 10 cities, we will issue our report summarizing what we’ve heard. [The report] will be vetted by those who have participated and include recommendations for change. Those recommendations could be for the profession to self-adopt, or recommendations for regulators and academics. Perhaps we’ll also have some recommendations to make to Congress. It depends on what we hear.

What are constituents saying? Have their comments surprised you?For one, investors don’t necessarily want more information; they want more useful information. They’re looking for quality over quantity. The biggest surprise that has emerged for me is that they’re not necessarily looking for real-time information. Right now the financial information that investors get is all backward-looking, but they’re looking for some kind of a tool to see the trends that are emerging. Other things we’re seeing is that the financial information needs to serve a wide array of investors, and that investors would like technology to be harnessed in a way that they can slice and dice information on their own and further customize it.

What do investors say about auditing? They view public-company auditors as an ally and see the value of auditing. They would like public-company auditors to help companies prevent fraud. [Investors] recognize that it’s not just public-company auditors who have a responsibility to detect fraud — that it’s really a whole supply chain worth of people who have responsibility to detect and help companies prevent it.

A recent Government Accountability Office report said concentration among the large accounting firms is not a big problem. But auditing constituents could be hurt if a big firm, like Arthur Andersen, merges or collapses. Do you think competition in the industry is at an acceptable level? The issue of concentration is very much on the profession’s mind. I think that the profession agrees with the conclusions of the GAO report, that there is competition out there and that there are a number of audit firms from which public companies can choose to help them do their work. But they also recognize that a lot of the marketplace is concentrated in a handful of firms.

CFO.com recently reported on a small company that left a Big Four firm for a smaller auditor because of cost. What is the difference between a Big Four auditing firm and a smaller, regional firm besides cost savings? Do the larger firms actually have more talent and experience? The largest firms have larger pools of resources just by their sheer size and scope. They can service more than one region or a number of industries, so they have breadth. On the other hand, some of the smaller firms can either concentrate on a particular region and/or a handful of particular industries, so I think there are pros and cons to both.

What’s great for the marketplace is that public companies can make that choice. More and more companies are looking across the spectrum and looking beyond the largest firms, particularly [seeking firms that operate] in their region or that specialize in their industry. Companies need to make an informed decision to look at what’s best for them. A company that has a robust internal audit function or that has a number of experts on its board may need something much different than a small company whose executives wear many different hats and may not have invested as much in the internal audit function as others.

There’s been a recent push from regulators to allow U.S. companies to use international financial reporting standards. Are the accounting firms prepared for such a change?At the Global Public Policy Symposium in New York that I attended, convergence was very much on the agenda. I think that everybody agrees that convergence to a single set of high quality standards is important and that the easiest way to do that would be the adoption of IFRS. We’ve got to start teaching those standards in the universities. We should all work together to develop a comprehensive plan with timetables and steps in the proper sequence to make sure that we can adopt it and implement it very vigorously.

Could smaller firms be left behind in this IFRS movement if they don’t have the resources to train their people? We certainly would not want that to happen. We will do everything that we can to help our 800 members make sure that they have the resources they need. We will continue to have webcasts and issue alerts to help them prepare for that.

Part of the CAQ’s mission is to get public-company audits to be more transparent and reliable. Is that happening? That’s very much the focus of our public dialogue tours. It’s always an evolution. One thing we’ve done very well this year is to issue white papers on the subprime mortgage [crisis]. The papers were a way for the profession to step up and remind the marketplace of what the responsibilities were in these difficult complex times with respect to changes in the marketplace. It’s a tangible example of how we are constantly striving to improve the process.